TLKM:All eyes on data and internet - Mandiri

Telkom Indonesia (TLKM) remains as the leader in the cellular market leader with subscribers growing to 93mn (+15% yoy in FY10). However, FY10 results, as expected, was relatively constant as a result of tighter competition in 4Q10. While subscribers still grew, we noted that minutes of usage (MoU) turns out to decline. We also think this year may still be a challenging time, thus we presume a conservative revenue growth of 5.7% in FY11F for now. Being aware of this unfriendly business climate, TLKM would be more focus on data and internet, but we think an upgrade in network infrastructure is required to support it. Maintain Neutral at lower TP of Rp7,600.

Steady result as expected. TLKM sealed 2010 with steady outcome as revenue reached Rp68.6tn (+1.4% yoy, -7.7% qoq), inline with our and consensus estimates. Relatively flat cellular revenue of Rp29.1tn (+2.1% yoy) and dwindling fixed line to Rp12.9 (-9.4% yoy) were offset by data and internet services, which grew quite strongly to Rp19.8tn (+7.0% yoy). Healthy data and internet segments can also be seen from robust subscriber growth in its fixed (+44% yoy) and mobile (+128% yoy) broadband services. Meanwhile, fixed wireless (Flexi) faced strong pressure as both MoU and RPM declined respectively, while subscribers were flat.

Lower MoU despite higher subscribers.. While TLKM was still able to gain cellular subscribers (+15.1% yoy), it did not translate into higher usage as MoU slightly declined to 129bn minutes, although it has steadily increased since 2Q10. As a result of lower MoU, RPM improved slightly to Rp220 (+5.3% yoy). We think competition in FY11F is still stringent however price war is less intensive. Given this, we preview TLKM may chalk up around 6% revenue growth, yet potential upside is still there should data and internet continue to outperform.

Network improvement required. In order to cope with rising trend in data and internet business, TLKM will be more focused on its data and internet service (FY10: 28.9% of revenue). We expect this segment will have robust growth in the near future. However, TLKM must essentially improve its network quality by replacing copper wire with fiber optic (i.e. longer distance, higher bandwith, faster) and implementing new 10/40 GBps tera router (i.e. better transport layer), as scheduled by TLKM this year.

Maintain Neutral at lower TP. We maintain our Neutral stance on TLKM at lower TP of Rp7,600 based on sign that cellular climate is still challenging for TLKM in FY11F. TLKM is currently at PER 11F 11.6x and PBV 11F 2.6x.